Current and Forecasted Conditions Play Havoc with Higher Ed Revenue Growth

According to the National Center for Education Statistics, the number of high school graduates in the Northeast and Midwest is projected to decrease between 2013 and 2028 by 7% and 2%, respectively. Colleges and universities throughout the region, including many in Pennsylvania, Ohio, West Virginia and Michigan, are already looking at ways to address the potential effects of that shrinking supply of talent, which represents a true limiter to net tuition revenue growth.

In recent years, the higher education sector has been in the hot seat amidst steadily rising tuition rates. Based on analysis by the College Board, matriculation costs at public four-year schools, when adjusted for inflation, have tripled in the last three decades, while those at public two-year and private nonprofit four-year schools have doubled. That’s scared off a number of prospective price-sensitive students and forced many institutions to implement cost containment strategies to prevent future tuition increases. The result has been a negative perfect storm of sorts, combining the aforementioned diminishing pool of candidates with a reluctance on the part of many of those candidates to “invest” in a college degree and the ongoing institutional challenge to maintain educational affordability.

Endowments, then – and the income they garner – have become increasingly essential for institutions looking to fulfilling their missions. The potential for an economic slowdown, which would undoubtedly hurt endowment returns, puts further pressure on bottom lines. According to data from the National Association of College and University Business Officers covering over 800 U.S. colleges and universities, 10-year endowment returns ending in fiscal year 2018 were at 5.8%, well short of the group's 7.2% average long-term target. Despite missing that targeted return and even after considering the effects of inflation, a majority of institutions raised their endowed fund spending last year, as that income has become increasingly pivotal to the institution’s overall financial position.

In addition, the changes to tax law brought about by the 2017 Tax Cuts and Jobs Act have increased the prospects that institutions may pay tax on unrelated business income, which has become key to helping institution’s diversify and grow total revenue.

Revenue growth is, and will undoubtedly continue to be, a comprehensive challenge. If your institution would like assistance navigating the industry sector’s current business conditions, contact Schneider Downs and visit the Schneider Downs Educational Services Industry Group.